Can the magic Modi conjured up for Gujarat's PSUs be replicated at national level?

Arup Roy Choudhury is used to constant battles. The chairman and managing director of the Rs 73,904-crore public sector undertaking (PSU) NTPC Ltd, India's largest producer of electricity, spends a fair bit of his time scrapping with bankrupt state electricity boards (SEBs) that owe a staggering Rs 2 lakh crore to their lenders.

Under Modi’s reign, loss-making Gujarat PSUs have turned around and logged an impressive growth. The hope is that Modi will be able to repeat the same at the Centre.

If not the SEBs, he is taking on Coal India Ltd (CIL), another PSU, over quality and quantity of coal supplies. And if not CIL, he is battling with state governments — from Bihar to Delhi — over electricity supply.

"We operate under constant fear and pressures," he says. These days, though, as the new government prepares to take charge, Choudhury is unusually buoyant. "We are hoping that a lot will change around PSUs. And I hope they [the new government] do it within the first month of taking charge else it will be difficult to do," he says sitting in his expansive office at the SCOPE Complex, a PSU hub in south Delhi.

Choudhury's impatience and optimism are matched by the surge in the stock market. NTPC shares have moved from Rs 111.5 around three months ago (BSE closing on March 1) to Rs 160.35 on Friday. Other bellwether PSU stocks too have joined the party.

CIL shares have jumped from Rs 244.35 to Rs 397.55 during the period. And Bhel shares have jumped from Rs 161.40 to Rs 277.89.

PSU stocks across key sectors — from infrastructure to energy to banks — are logging an impressive rise. The BSE S&P PSU index has soared by over a third since the beginning of the year to a little over 8100.

"When the government's fiscal condition is not good, P&L [profit and loss] accounts [of PSUs] are misused. This is going on for the past 10 years," says Raamdeo Agrawal, co-founder, Motilal Oswal Financial Services.

That explains why PSU stocks have been underperforming the broader market. They're turning around now because the expectation is that "things will be better" under the new government.

Some Vroom for PSUs

Last month, global investment bank CLSA put out a report titled "Drawing from Gujarat PSUs", throwing light on what to expect from the Modi government on PSUs. More recently another bank Credit Suisse put out a similar note on state-owned companies.

"We expect the CPSEs [central PSUs] to become more efficient and empowered as political interference is expected to come down," says Arvind Mahajan, national head, energy, infrastructure and government, KPMG.

Already, news reports suggest the new government will explore breaking up CIL — the world's largest coal producer — into independent entities with state governments being made equity holders to improve production.

The new government will also consider opening up the sector to foreign investment to improve coal production and curb imports.

With the country's coal output far below demand, India today is the world's third largest importer of coal despite huge domestic coal reserves. CIL may be among the top priorities but experts expect deeper and wider changes in the way the entire public sector is governed.

"There is a feeling that in sectors like power and oil, deregulation will be swifter. Hard decisions around subsidy that do not affect the poor will be taken without hesitation," says Nitin Jain, CEO, capital markets, Edelweiss.

But there is a bigger reason why experts foresee better days for PSUs. It has to do with prime minister designate Narendra Modi's track record in managing PSUs in Gujarat. Under Modi's reign, loss-making Gujarat PSUs have turned around and logged an impressive growth. The hope is that Modi will be able to repeat the same at the Centre.

The Gujarat Story

When Modi took charge in 2001, many Gujarat state PSUs such as Gujarat State Fertilizer & Chemicals (GSFC) and Gujarat Alkalies & Chemicals Ltd (GACL) were making losses. Not anymore. The CLSA report says: "Some successful turnaround stories from Gujarat viz GSFC raise hopes for the likes of MTNL and PSU banks."

According to the latest government report on state-level public enterprises (SLPEs) for fiscal year 2010, PSUs from only three states — Gujarat, Kerala and Madhya Pradesh — are cumulative profit-making enterprises. Uttar Pradesh's PSUs are the worst performers.

Gujarat PSUs top the list with a cumulative profit of Rs 5,800 crore. The CLSA report notes that the Gujarat PSU stocks have outperformed by far the broader BSE S&P PSU index over the past 10 years. It also says that the six major listed Gujarat PSUs (Gujarat Mineral Development Corp, Gujarat State Petronet Ltd, GSFC, GACL, Gujarat Info Petro Ltd and Gujarat Narmada Valley Fertilizers & Chemicals) with a cumulative market value of $2.4 billion have grown their net profits at an average rate of 19% over the past 10 years.
Consider GSPC (2012-13 revenues: Rs 10,304 crore), an oil and gas exploration PSU in which the Gujarat government has a 95% stake and is its flagship energy firm with controlling stakes in over a dozen ventures including Gujarat State Petronet Ltd (GSPL) and Gujarat Gas (acquired from British Gas in 2012).

In 2005, GSPC announced a gas discovery in the Krishna-Godavari Basin and today has 64 blocks, 53 in India and the rest in Australia, Egypt, Indonesia and Yemen. "When British Gas decided to sell its India business, there were many bidders. But GSPC moved the fastest and sealed the deal," says Mahesh Nandurkar, executive director, CLSA.

GSPC's subsidiary GSPL, which is building infrastructure to transmit gas in the state, has seen revenues and net profits rise at a cumulative average rate of 30% and 42% over the past 10 years. This is in sharp contrast to the performance of PSUs in other states and at the Centre. "Most state-level PSUs are either dead or are making losses. The Gujarat story is different," says Ajay Shah, professor at National Institute of Public Finance and Policy (NIPFP) and also an independent director on the GSFC board.

Modi's Recipe

Ravindra Dholakia, professor at Indian Institute of Management, Ahmedabad (IIM-A), recalls the days when Modi first took over as chief minister of Gujarat in 2001. That was a time when committee after committee was being set up to restructure PSUs but nothing was working.

When Modi took charge, he set up a PSU restructuring committee headed by Hasmukh Shah and all ailing state PSUs were referred to this committee of which Dholakia was a member, along with a clutch of other economists, bureaucrats and management experts.

Their first important observation was that political interference was the biggest and most obvious problem that PSUs faced. Often the chairman of the board and at times even the MD was a politician. The board too had many politicians and political appointees.
"Modi promptly moved on the matter and cut down political interference," Dholakia says. He often personally interviewed candidates for the post of CMD and for board positions, and handpicked bureaucrats to steer the PSUs.

Once appointed, he would give them sufficient autonomy with clear targets, and a robust monitoring mechanism. Avers Maheshwar Sahu, a high-profile retired IAS officer from Gujarat: "Along with the autonomy, a strong oversight team to closely monitor progress has helped."

Of the 12 PSUs first referred, four were social PSUs which were unlikely to make profits. The remaining eight began turning around within a year. Atanu Chakraborty, MD of GSFC, reaffirms this. "For me, interface with the government is limited to policy issues," he says. For most operational issues, he does not have to seek approval.

Standard operating procedures on most fronts have been decided and laid down. The PSU is board driven with many professionals including former Citibank executive DC Anjaria, NIPFP's Shah and Stanford alumnus and IIM-A professor Vasant P Gandhi. "The board takes responsibilities and is held accountable. Recruitment here is rule-driven," says Chakraborty.

Having a professional and empowered board that understands markets and products has helped GSFC fortify its business. "By PSU standards, it is fairly aggressive. There is no political meddling," says Shah who, besides GSFC, is also on the board of many private sector companies, including JSW Steel. GSFC is now venturing into Canada to harness low gas prices to produce fertilizer there and has also forayed into Tunisia and Morocco to secure raw material.

Simplifying institutional mechanisms has also helped. For example, in Gujarat there is one energy minister, and petroleum, electricity, gas and the like are all under one department, says DJ Pandian, principal secretary, energy and petrochem, to Gujarat government. Gujarat is also unique in having a financing arm for PSUs called Gujarat State Financial Services, says Dholakia.

The outfit provides funds at lower rates to PSUs and also offers them avenues to park their surplus funds with attractive returns. This has enabled state firms like GSPL to undertake risky ventures like gas exploration. Not to forget that Gujarat has substantially relaxed labour laws.

There are 229 operating CPSEs today, 46 of which are traded on stock exchanges. Some 79 of them are loss making; and although 150 are profitable, most lag their industry peers on profitability. "Nobody questions why are they making a lower profit," says M Jitendran, former CMD of Cochin Shipyard Ltd. Numbers lay bare the truth. In 2012-13, at an aggregate level, CPSEs had a total revenues of Rs 19,31,150 crore and net profit of Rs 1,15,300 crore. The workforce at over 14 lakh (excluding contractual workers) ran up a salary and wages bill of Rs 1,16,375 crore.

Like in the pre-Modi era in Gujarat, most CPSEs suffer from similar problems. They have become an important tool to push political agendas for successive governments, often giving business rationale a short shrift. In February this year, for instance, the UPA government announced a project of Rs 3,650 crore in Amethi for the loss-making PSU Hindustan Paper Corp to set up a paper mill. Often decisions are not fiscally prudent.

For example, the Board for Industrial and Financial Reconstruction (BIFR) had recommended closure of Scooters India in 2012. The company employing 1,200 people had been making losses since 2002-03. In the run up to the elections, the government instead infused Rs 200 crore and wrote off around Rs 1,100 crore in losses. "They did not want to lay off people," says a former secretary to the government of India who was privy to the episode.

Political interference is at every level — from appointments and locating plants to tendering of contracts and shaping key business decisions. A retired IAS officer, who has served as director on many PSU boards, including steel behemoth SAIL, says: "Politicians see PSUs as a place to expand their political influence. And this starts with the CMD's appointment. They pick those who are more pliable." He saw SAIL executives collude with private sector executives to shape their production and pricing strategy to benefit the latter. Tendering and contracts were often rigged to favour specific companies.

The Future Course

What will be Delhi's PSU strategy? So far, the thrust has been on disinvestment and using it to generate revenue for the government. The BJP-led NDA regime (1998-2004) had set up a dedicated disinvestment ministry headed by Arun Shourie. At that time, the government sold around 35 PSUs with the disinvestment proceeds standing at around $5.5 billion, says the CLSA report on Gujarat PSUs. The UPA government too pursued divestment and raised around $21 billion through this route over the past 10 years, according to CLSA. One clear signal is that the thrust on disinvestment will come down. The BJP manifesto has been silent on disinvestment.

"His [Modi's] views are not the same as mine," Shourie admitted in an interview to ET earlier this week. There is a question mark on the ongoing PSU stake sales. The interim budget in February had projected Rs 52,000 crore from the sale of PSU stakes. "There will be constraint of resources. Other means will be required for revenue generation," Shourie said.

But experts feel the ongoing minority stake sale in PSUs like Hindustan Zinc and Bharat Aluminium to continue. The new government's thrust will be to find ways to make existing PSUs more efficient. "He [Modi] has managed to turn around industries like GSFC and the electricity boards," Shourie told ET.

From banking to key strategic sectors like energy and infrastructure, expect a big push by the Modi government in infusing efficient and professional management. According to media reports, the new government is expected to prioritize its attention to turn around sectors like coal, steel and power.

New projects in areas like road, railways, freight transport, ports and the Delhi-Mumbai Industrial Corridor too will get attention. There is also an expectation that the Modi government will seek foreign direct investment (FDI) in some of the key sectors like power generation and infrastructure. Bear in mind that many of these sectors are dominated by PSUs.

"India should have FDI in power generation. This is a golden opportunity for us as lots of companies are moving out of China," said Shourie. Many hope that the new government will have a differentiated strategy towards PSUs. "The government should pick up PSUs of strategic importance either in social or economic sectors and focus on growing and making them efficient.

For the rest, it should not be in the business of business," says Choudhury of NTPC. He says he would like to see the CPSEs number come down from 277, including non-operational ones, to 50 odd. Even as the new government figures out its PSU strategy, veterans in the sector have a few suggestions to offer. The first one is they want the government to do all the big-ticket administrative changes to the PSUs as soon as possible when the iron is hot. They feel if it will get tougher as time passes.

Two, right now, PSUs are managed and monitored by multiple ministries — finance, administrative ministry, PSEB, DPE, CAG etc. Like in China, they suggest setting up a body like State-owned Assets Supervision and Administration Commission (SASAC), the nodal agency in charge of everything — from appointments to monitoring — for stateowned enterprises. This will also substantially cut down political interference. Three, create a public sector management pool that will steer these PSUs.

Often PSUs are headed by bureaucrats with very little knowledge of the business. Many suggest that the lines between bureaucrats and technocrats should be blurred so that the best professional available — irrespective of cadre — gets the top job. Four, the government must set commercial parameters to judge performance.

So while providing autonomy in dayto-day operations, it must set out a broad vision with specific deliverables and create a robust monitoring mechanism to keep an eye on targets. Five, even in the unprofitable social sectors where the government is ploughing money, it must specify its social objectives and measure the outcomes. Will all these recommendations be on Modi's to-do list for PSUs? Watch this space.

This article taken from Economic Times :,curpg-5.cms

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